There seems to be a Winston Churchill quote for every occasion. Sure enough, while pondering the current status of the Federal Reserve’s rate hike cycle, a relevant Churchill phrase popped into my head.

In 1942, after the Allies had finally scored a major victory against the Germans, British Prime Minister Winston Churchill famously intoned: “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

Much of the recent stock market rally has been driven by a change in Wall Street’s expectations about the Fed’s future monetary policy stance. Investors have grown optimistic that the Fed is nearing the end of its monetary tightening and will make a dovish pivot in the autumn. That might be wishful thinking, but on the other hand, it’s reasonable to assume that the central bank has ended its initial aggressive phase.

According to minutes released Wednesday, Federal Open Market Committee Meeting (FOMC) officials at their July meeting suggested they probably wouldn’t ease up on interest rate increases until inflation significantly falls, but neither did they hint at anything draconian.

During its July meeting at which the U.S. central bank approved a 0.75% rate hike, policymakers reiterated their intention to curb inflation that is running much higher than the Fed’s 2% target

FOMC officials didn’t convey specific guidance for future increases, but the market is pricing in a 0.50% rate hike at the September meeting. Inflation reports have been encouraging lately; we’re likely to get further good news on that front. The Fed is still tightening, but the stock market is betting that the worst is behind us.

Missing the target…

The major U.S. stock market indices closed lower Wednesday; they were trading flat in pre-market futures contracts Thursday.

Horrific second-quarter earnings results from big box retailer Target (NYSE: TGT) have spooked the entire market. Overall, U.S. retail sales for July showed resilience, and other major retailers have posted solid Q2 earnings results so far. However, Target this week unveiled Q2 earnings that were 90% lower year over year, which sent a chill down investor spines.

Target is rapidly selling off unwanted inventory, which is clobbering its profitability. The retailer is getting better positioned for future quarters, when inflation and supply chain worries have (hopefully) eased.

The S&P 500 has risen about 11% over the past month. After its powerful run, the stock market seems to be taking a breather. That said, robust job market conditions should continue supporting consumer household consumption, which in turn increases the odds of a rebound in U.S. gross domestic product (GDP) growth in the third quarter.

Read This Story: The Consumer: Battered But Unbowed

After a brief slump, which has brought the per-barrel price of crude oil below $100, energy prices have resumed their upward trajectory amid supply constraints and economic optimism.

The U.S. benchmark West Texas Intermediate (WTI) hovers at $89/bbl; Brent North Sea crude, on which international oils are priced, stands at about $94/bbl (as of this writing August 18).

Energy inflation is the dominant global narrative, and the picture is bleakest in Europe. Because of the European Union’s reliance on Russian oil and gas, Western sanctions against Russia for its invasion of Ukraine weigh heavily on the EU (see chart).

Energy annual inflation in the EU reached 41.1% in July, up 14.1 percentage points since the start of the year. The EU’s energy has become increasingly expensive, as the trading bloc is forced to look for other sources due to bans on Russian imports.

Western sanctions are having a severely negative effect on Russia, and the vise on Russian President Vladimir Putin’s military machine will only get tighter with the onset of winter. The suggestion of some analysts that sanctions have not substantially hurt Russia is erroneous.

Russia is facing a deep recession, one that even the Bank of Russia admits will be “of a transformational, structural nature.” Russian GDP is expected to contract by about 8.8% in 2022 and inflation in the country is on track to reach a whopping 23% this year.

On top of these global woes, China’s economy is sputtering. New data this week from China’s National Bureau of Statistics showed that China’s economic slowdown worsened in July, with unexpectedly sharp slumps in retail sales, industrial output and investment.

In response, China’s central bank slashed interest rates, but the move is unlikely to do much good, as the country grapples with a property crisis, debt woes, and the economic fallout from its harsh COVID lockdowns.

The global economy remains fragile, and market volatility is likely to continue. But after two consecutive quarters of negative GDP growth, the U.S. economy is showing signs of strength, and inflation appears to be cooling. The market’s rough patch isn’t over, but perhaps the end is in sight.

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John Persinos is the editorial director of Investing Daily.

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